UPDATED ON December 28, 2019
When the higher rates of Stamp Duty Land Tax (SDLT) for additional homes were introduced in 2016, it was never going to be a straightforward job.
One standout example of how tricky the rules were to implement is the case of ‘granny flats’ – self-contained separate dwellings in the same building as the main property (or occasionally in the grounds of the main property).
Whether a property comprises one dwelling or two can, in itself, be a difficult question. You’ll need to look at factors such as whether each part has all its own independent facilities – for cooking and washing, for example – that you’d expect in a dwelling.
Shifting the granny flat goal posts
When the higher rates of SDLT first came into force on 1 April 2016, the effect of the rules was that purchasers of properties with a granny flat that counted as two dwellings would be liable to pay the extra 3% SDLT. (The surcharge applies to the whole property price and is then added onto the regular SDLT due).
In this case, the higher 3% rates of SDLT would have applied even if this was your only property or it was replacing your only or main residence (read more about replacement of main residence rules).
However, the Government thought better of it and, due to what it described as a ‘technical unfairness’, made amendments to the Finance Act 2016 which was passed (became law) on 15 September 2016.
The first HMRC Guidance Note (16 March, 2016) did not cover the granny annex rules because they were introduced later than this. HMRC issued a revised Guidance Note on 29 November, 2016 which gives some explanation of the operation of these rules.
This Guidance Note was archived after the text was moved (with some alterations) at the end of March 2018 into HMRC’s Manual. The text on subsidiary dwellings in the Manual can be found here.
HMRC carried out a review of the definition of 'dwelling' for some stamp duty land tax purposes and published new pages in the Manual on 1 October 2019 dealing with the issue of whether a property comprises one dwelling or two.
These run from SDLTM00410 to SDLTM00430 and can be found here.
The subsidiary dwelling test
A new test (which I will call the ‘subsidiary dwelling’ test) was introduced by the Finance Act 2016. The test is applied to cases where two or more dwellings are being purchased in a single transaction – which can include properties with a granny flat.
The amended rules apply where:
- At least two-thirds of the overall price is attributed to the main dwelling (this will need to be a ‘just and reasonable’ apportionment)
- The subsidiary dwelling (or ‘granny flat’) forms part of the same building as the main dwelling OR is within the grounds of the main dwelling.
The good news is that it does not matter how the granny flat is to be used. For example, it could be let out privately rather than lived in by a family member.
There are also no rules within the subsidiary dwelling test around whether planning conditions limit how the granny flat is occupied, or around how and when you can sell or dispose of it.
If you are buying a home with a granny flat, it is important to understand the new subsidiary dwelling test. It means the higher rates of SDLT will not automatically apply to the purchase of properties with granny flats (so long as it is either your only property or is replacing your only or main residence).
Can I qualify for Multiple Dwellings Relief?
As part of this, it is important to mention Multiple Dwellings Relief (MDR). This is a legitimate means of reducing the SDLT payable on purchases involving several dwellings – granny flats often included.
The original HMRC guidance suggested that, if you claim MDR, the 3% surcharge automatically applied.
The position has gradually evolved and, whilst HMRC guidance on the issue is still not completely clear, it gave a confirmation in a Talking Points webinar of 23 July 2019 that claiming MDR does not necessarily result in the 3% surcharge applying. This confirms what it had previously said informally before and in individual cases. You can find a write up on the issues here.
Buying properties with a granny flat: how it works in practice
To illustrate some of the complex rules around how the purchase of properties with a granny flat work, here are some worked examples:
1. Buying a house with granny flat WITHOUT paying the surcharge
Under the amended rules it is possible to buy a property which counts as two dwellings in a single transaction and escape the 3% SDLT surcharge if the following conditions can be met:
• The less valuable dwelling is part of the same building as the more valuable one OR is within the grounds of the more valuable one.
• The more valuable dwelling amounts to two-thirds or more of the overall value.
The property will also either have to be your only property or a replacement of your only or main residence. And if it is the latter, you will need to be moving into the more valuable of the two dwellings you are buying.
Price of both dwellings: £500,000SDLT payable: £5,000How it is worked out: (2 x £2,500. £2,500 being the SDLT on the average price of £250K without the surcharge)
2. Buying a house with granny flat PAYING the surcharge
It is not always the case that you will be able to avoid the SDLT surcharge when buying a property comprising two dwellings in a single transaction. For example, the transaction might not satisfy the subsidiary dwelling test on one or more of the following grounds:
- The granny flat is neither in the same building NOR in the grounds of the main dwelling.
- The more valuable dwelling is not worth at least two-thirds of the total price.
Alternatively, it could be that the subsidiary dwelling test IS satisfied, but the surcharge still bites because you have other property interests and are not replacing an only or main residence.
Price of both dwellings: £500,000 SDLT payable: £20,000How it's worked out: (2 x £10,000. £10,000 being the SDLT with the surcharge on the average price of £250,000 if multiple dwellings relief is claimed)
3. Buying a single dwelling with a non-residential property
What if the purchase of a single dwelling comes alongside a property that is non-residential? This could be a flat with a shop below it for example or a house with an adjoining field that is let to a farmer.
In this case, different non-residential rates of SDLT apply. And this means there is no question of the surcharge applying.
Price of combined property: £500,000SDLT payable: £14,500How it is worked out: On the non-residential slice rates, so 0% on the first £150,000, 2% on the next £100,000 (£2,000) and 5% on the rest (£12,500)
Where new granny flat rules won’t apply
In some cases, you can buy what looks like one property comprising two dwellings – but it transpires that different connected sellers own different parts of the property. For example, a husband owns the main house and his wife owns the gardener’s cottage.
In this case, the granny flat rules cannot apply as the properties are not being purchased in a single transaction but in two ‘linked transactions’. You can read more about linked transaction rules on HMRC’s website.
If you would like further information on how 3% Stamp Duty Land Tax applies to granny flats and other dwellings, read my article here.
This article is intended for general information purposes only and does not constitute legal or professional advice. Some of the examples are not covered by HMRC guidance and the official view of HMRC on the correct analysis is not known. Advice should be sought before proceeding with any transaction. The same applies to postings made to the comments section of Zoopla's website.